While it sounds mundane, the “Residual Interest Income” issue has the potential to literally change the face of the regulated derivatives industry.

In just one line of a massive Dodd Frank bill with unnecessary complexity and obfuscation, large bank interests may complete monopolistic control over the derivatives industry.

This is the point that has been absent from many of the industry comment letters and should be on the radar of government regulators.

To understand, keep the topic simple.

With one line amongst millions of legislative words, government regulators will effectively dis-advantage mid-sized Futures Commission Merchants (FCMs), likely forcing many out of business, which has been widely discussed and commented on. The point missing in discussions is the implications, the “unintended” consequences of how this provides literal control of the futures brokerage industry by a small cartel of banking interests with a Too Big to Fail guarantee.

Monopolistic control over the futures industry is not a new topic. The discussion has always taken shape on the exchange side of the business. Brokerage has not been actively considered in the public discussion, but the impact could be the same.

Consequences for farmers and hedgers could be dramatic, as most of these independent business executives work with mid-sized brokerage firms. In effect, this could impact the stability of the market, which is why certain large bank executives might have taken the side of independent FCMs.

At a minimum the long term impact of this issue should be studied by the CFTC and openly discussed relative to the impact it might have on hedgers and creating a monopoly in a key sector of the US financial services industry.

DISCLOSURE: These are the opinions of the author and may not have considered all risk factors. Nothing on this web site should be construed as an individual recommendation, talk to your independent advisor. The author and Opalesque may have relationships with those people they cover in the publication. Mr. Melin provides a full disclosure of his business relationships to regulators and certain eligible participants who engage him in consulting projects. Managed futures investing involves risk and there are no guarantees of safety or future performance being implied. Managed futures can be a risky investment. This web site and its content is subject to the terms of the web site. Risk Disclosure and terms of web site are available here: http://www.uncorrelatedinvestments.com/templates/Disclaimer.html Performance information received on this site is provided by third parties and deemed reliable but there is no guarantee relative to same. Performance reporting sources and quality assurance techniques may include, but are not limited to: disclosure document, CTA self reporting, brokerage firm reporting, consultant reporting, spot checking other reporting databases; nonetheless no guarantee of accuracy or implication performance verification or auditing is being made by the publishers. The CTA Database is a project separately managed from www.uncorrelatedinvestments.com.

15 Responses

An intriguing discussion is worth comment. I believe that you simply should really write even more on this subject, it could not be a taboo topic but generally folks aren’t sufficient to speak on such topics. To the next. Cheers

Funny you say that. It’s always been a taboo topic. This morning woke up and was thinking about writing on new school vs old school derivatives management for Monday. Phillip McBride Johnson (former CFTC chairman, old school morals) wrote a great article that touched on the topic near the end. Here is a link: http://beta.futuresmag.com/2013/03/01/sinking-the-dodd-frank-ship In terms of writing more about the ongoing war that has taken place since former CFTC Chairperson Brooksley Born was rudely removed from office, its a touchy topic. In the middle of an MF Global fight not sure want to open up old battle scars…

Youre so cool! I dont suppose Ive read anything like this just before. So nice to discover somebody with some original thoughts on this topic. realy thank you for starting this up. this internet site is something that’s required on the web, someone having a little originality. useful job for bringing some thing new to the internet!

You can find some intriguing points in time in this post but I do not know if I see all of them center to heart. There’s some validity but I will take hold opinion until I look into it further. Good article , thanks and we want much more! Added to FeedBurner at the same time

An interesting discussion is worth comment. I think that you need to write much more on this topic, it may well not be a taboo subject but typically persons are not enough to speak on such topics. To the next. Cheers